3 Pullback Trades to Insure Gains

Buy the KIE ETF or a few individual insurers on the dip

With natural disasters like “superstorms,” nor’easters, meteors and the upcoming tornado season taking aim on the world, you would that the insurance sector would have a target on its back as its component companies write checks to cover claims. Apparently that’s not the case, though, as the SPDR S&P Insurance ETF (NYSE:KIE) and its holdings are reaching new highs and beating the market.

The recent earnings season showed strength among the insurance sector as companies like Allstate (NYSE:ALL), Hartford Financial Services (NYSE:HIG), Travelers (NYSE:TRV) and Cincinnati Financial (NASDAQ:CINF) all blew analyst earnings estimates out of the water.

These companies have maneuvered their way through the low-interest-rate environment handily as they have been able to manage their insurance exposure while revenue has been on the rise. Also, recent natural disasters likely will keep demand high for these insurers’ products and services.

With a strong fundamental and technical picture in place, the insurance sector should be among Wall Street’s favorites, but that’s not the case. Among 23 widely traded ETFs tracked by our database, the KIE stands at No. 18 in terms of buy recommendations, making it one of the least-favored sectors on the Street.

Similarly, the short selling crowd has been actively shorting the KIE shares, along with many of its component companies. Among the more widely traded ETFs, KIE boasts the sixth-highest short interest ratio (5.2), indicating there is a high probability that shares will continue to move higher as a result of the shorts getting squeezed from their positions.

Any way you look at it, from our Behavioral Valuation approach (combining fundamental, technical and sentiment), the insurance sector is set to continue its leadership in the market.

We’re expecting stocks to continue to pull back a bit in the short-term, which means traders will have the opportunity to get into some of the best leadership in the market for a deal. You just have to know what you want before the pullback gets here.

With that in mind, here are a few trading ideas for the insurance sector:

Buy the Sector Via KIE

Click to Enlarge This trade approach falls under the “keep it simple” rule. KIE shares are outpacing the S&P 500 by almost 2:1, performance that we expect to continue. Buying these shares on a pullback to the $47 range would represent a nearly 5% discount from current levels, which remain above key technical support trendlines, depicting a good technical entry.

CNO Financial

Click to Enlarge More aggressive traders might choose to take aim at individual companies for their trading strategy. The first of two we recommend is CNO Financial (NYSE:CNO), which just beat earnings estimates last week, sending the Street on a game of catch-up.

CNO shares popped to the $11.50 level and have run into resistance. We’re expecting to see a retracement to the $10.50 level (site of the shares’ 20-day moving average), which would serve as a good bullish trade entry. Sentiment is pessimistically positioned, meaning there is a lot of potential for the market to migrate money into these shares over the intermediate-term period (three to six months).

Allstate

Click to Enlarge Insurance giant Allstate has been a relative-strength leader since August 2012 — a trend we believe will continue. The “Good Hands” company is up more than 16% in 2013, more than twice the S&P 500. This performance comes from a steady, low-volatility trend in share prices, making a holding in ALL even more attractive.

According to our research, shares are likely to find support at the $44 level on a pullback in the market — a price we think makes a great entry point for traders looking for deals in the insurance universe.

As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.